SEC reviewing Illinois pension predictions

Tuesday

Jan 25, 2011 at 12:01 AMJan 25, 2011 at 10:34 AM

Gov. Pat Quinn’s administration confirmed Tuesday that the federal Securities and Exchange Commission is conducting an inquiry into statements made by Illinois officials about prospective long-term savings from pension reforms passed last year.

DOUG FINKE

Gov. Pat Quinn’s administration confirmed Tuesday that the federal Securities and Exchange Commission is conducting an inquiry into statements made by Illinois officials about prospective long-term savings from pension reforms passed last year.

Kelly Kraft, spokeswoman for Quinn’s budget office, said the SEC contacted the state in September regarding a “non-public inquiry” it was conducting regarding the financial effects of the reforms on the pension systems. The inquiry includes “communications relating to the potential savings or reduction in contributions by the state to the Illinois public pension systems,” Kraft said.

“We feel our disclosures are accurate and complete,” Kraft said. “In terms of what the SEC has told us, the non-public inquiry ‘should not be construed as an adverse reflection on any entity or individual involved, nor should it be interpreted as an indication by the Commission or its staff that any violations of the federal securities laws has occurred.’”

The existence of the inquiry was revealed in a report issued by Moody’s Investors Service updating Illinois’ credit rating in the wake of the tax increase passed earlier this month. Moody’s maintained the state’s A1 rating and negative outlook.

In a story published Tuesday, the Wall Street Journal quoted a Moody’s analyst saying one issue in the inquiry is whether Illinois is reducing current pension costs by using future savings from the pension reforms. Illinois believes it will save billions in future pension costs from the reforms, which included raising the retirement age for public pensioners and reducing the maximum pension payout.

During the lame-duck session, lawmakers approved a plan to borrow up to $4.1 billion to make this year’s pension payment. However, they also directed the pension systems to recompute their obligations based on the pension reforms. Legislative analysts believe that will drop the state’s required pension payment to about $3.7 billion.

Kraft said Illinois “took proactive steps to update its disclosures” after the SEC began looking into New Jersey’s failure to disclose some information about the financial condition of its pension funds.

“We feel our disclosures have always been accurate and complete,” Kraft said. “We are fully cooperating with the SEC inquiry.”

Moody’s said the tax hikes are “an important first step in restoring fiscal stability” for Illinois. However, Moody’s also said the increases do not fully achieve the state’s goal of long-term structural balance, since both the personal and corporate rates are scheduled to drop after four years.

Moody’s gave Illinois high marks for enacting spending caps, but noted the state still has an enormous backlog of bills and that lawmakers failed to approve an $8.7 billion bond issue to quickly pay those bills. That backlog is the main reason Moody’s kept the outlook for Illinois negative.

Another ratings agency, Standard & Poor’s, has affirmed it’s A-plus bond rating for the state, but removed Illinois from its CreditWatch with negative implications.

“The CreditWatch removal reflects our view of the state’s recently enacted legislation that provides for structural budget solutions which we believe will likely allow the state to begin to address its sizable accumulated budge deficit and could provide a foundation for structural budget balance in the future as well as improved liquidity,” said the Standard & Poor’s report.

The downside, it said, is the state’s ongoing pension deficit and the possibility that Illinois might issue bonds to pay off old bills.

A third agency, Fitch Ratings, affirmed its A rating for the state’s general obligation bonds and moved Illinois to “stable” from a negative outlook. Fitch said the action was taken in response to the income tax increase and spending caps passed by lawmakers. However, Fitch said the state will have a hard time paying off its bill backlog unless it borrows money to do it.